LONDON, Nov 27 (Reuters) - A couple of weeks ago it was 10-year Treasuries, last week 5-year bonds: hedge funds are shifting their view of the Fed and U.S. interest rates by magnitudes rarely seen before.

Speculators on U.S. futures markets slashed their bearish bets on 5-year Treasuries last week by the fifth largest amount since the Commodity Futures Trading Commission began compiling data in 1995.

This follows the third largest ever reversal in short 10-year Treasury futures the week before, and underscores the view that the Fed won’t raise rates next year nearly as much as it has indicated.

Slowing growth and wobbly stock markets won’t allow it.

Fed officials, led by vice chairman Richard Clarida, have struck a more cautious and dovish tone in recent weeks. A rate hike next month is fully priced, but fed funds futures now only fully discount one more increase next year.

The Fed will update its guidance at its Dec 18-19 meeting, but as of September the broad outlook pointed to three or maybe even four rate increases next year. Speculators are clearly taking the “under” on that trade.

CFTC data for the week ending Tuesday Nov. 20 show that funds and speculative accounts slashed their net short 5-year Treasury futures position by 124,356 contracts to 446,186 contracts. There have only been four bigger weekly positioning swings in favour of bonds since 1995.

Funds’ short position in 5-year bonds has virtually halved from the record net short of 867,556 contracts in August, and bullish momentum is accelerating rapidly. It has only been greater twice before: mid-2017 and March-June 2008.

The 5-year yield hit a decade-high of 3.10 percent on Nov. 8 but has fallen right back through 3.00 pct since. If the prospects for steady and continued Fed tightening fade, the 5-year yield may not be spending much more time above 3.00 pct.

The outlook for U.S. growth next year has darkened in recent weeks, thanks to the Trump administration’s tax cuts and fiscal stimulus wearing off mid-2019, a diminishing “wealth effect” from fragile stock markets, brewing global trade tensions, and the cumulative effect of three years of rising interest rates.

Plus, the U.S. expansion is already close to the longest in history. The end is drawing closer and funds are beginning to position themselves for it. Can the Fed continue to tighten policy at the same pace or at all?

Economists at Goldman Sachs and JP Morgan think so, and are sticking to their forecasts of four rate hikes next year. But the San Francisco Fed suggests policy may be too tight already, arguing that much of the pick-up in inflation is down to “acyclical factors”, and not the strengthening economy.

“While risks to the outlook for inflation appear broadly balanced, they include the considerable possibility that inflation has not yet sustainably reached target,” the San Francisco Fed said in a paper published this week.

A flattening yield curve is often interpreted as a sign that the bond market believes the longer-term growth and inflation outlook is dimming, which will limit the scope for higher interest rates.

And that’s exactly how hedge funds and speculators appear to be playing it. The latest CFTC data show that while funds cut back on their short positions in 5-year and 10-year bonds, they stuck with their huge short position in the two-year space.

They trimmed that position to 361,057 contracts from a record 362,374 contracts the week before. Effectively, funds are positioning for a flatter curve through short-term yields remaining elevated and longer-term yields drifting lower.

The curve has flattened over the last couple of months as stocks have wilted and growth fears have mushroomed. It’s not inverted yet - the classic precursor of every U.S. recession in the past half century - but it’s back at August’s multi-year low and now only 22 basis points away from inversion.

Of course, stretched positions, pricing, valuations and momentum are usually flashing lights for hedge funds to go against the tide and bet the other way. We’re not seeing it right across the U.S. bond market yet though.